Just in time for Obama – the economy is looking up

Voters are starting to take notice that a recovery is finally taking root. For a president who wants to get reelected, that’s welcome news.

Writing in this space a couple of months ago, I said I was cautiously optimistic about 2012. Well, my caution has greatly diminished. Since Christmas, nearly every economic indicator you can think of has come in stronger than expected: GDP, retail spending, the level of the stock market, and employment growth. January’s jobs report, which showed payrolls rising by 243,000 and the unemployment rate dropping to 8.3%, provided the most dramatic evidence that things are getting better, but it was part of a broader trend. Notwithstanding what is happening in Greece, even the threat from Europe appears to be receding.

Still, many economists remain pretty gloomy. Goldman Sachs, for example, is predicting GDP growth of 2% in the first quarter, followed by just 1.5% in the second quarter. Partly, that is a matter of professional pride: Having failed to predict that the boom of 2004-07 would end in tears, economists are determined not to succumb to wishful thinking this time around. But the caution also reflects a belief that many Americans are still too traumatized by the crash to go out and spend. “People are saying that they don’t expect to see their real incomes grow,” Ben Bernanke told Congress recently, “and that’s not a situation that encourages people to buy a house or start a business or anything like that.”

Where the Fed chairman sees cloudy skies, I see signs of the sun peeking through. In the past year or so, the Conference Board’s index of consumer confidence has risen from 52.5 to 61.1. Since the start of October, the S&P 500 (SPX) has jumped by about 20%. And the rebound in confidence and wealth is being reflected in spending. Auto sales are getting back to pre-recession levels. Many other manufacturers are doing well. So are retailers, restaurants, and hotels. Purchases of new homes remain depressed, but builders are feeling upbeat enough to have started breaking ground on more of them.

None of that should be surprising. After years of slow growth, there is lots of pent-up demand out there. Policy is still in stimulus mode: Interest rates are very low, and the federal government is running a big budget deficit. Now that the banking system is healing and the economy is finally creating jobs in decent numbers, the recovery could become self-sustaining, for a while anyway. True, the rise in oil prices to more than $100 a barrel will crimp demand somewhat if it persists. But Congress’s decision to extend the cut in the payroll tax will partially offset that.

Voters and investors are starting to take all this onboard. In the past few weeks President Obama’s approval rating has jumped to 50% in several polls. On Intrade, a website where speculators can wager on political outcomes, the implied probability of Obama’s being reelected hit 60% in mid-February. (Last fall the figure was well below 50%.) At the British bookmaker Ladbrokes, the odds of Obama’s winning have tightened to 8/15, which means you have to bet $150 to win $80.

But Ray Fair, a Yale professor who for 35 years has been trying to forecast elections based on economic variables, says his equations are pointing to a dead heat. “As of this writing, the economy in 2012 looks like it will be okay but not great, which means a close election — essentially too close to call,” he noted on his website. Still, Fair’s model, which incorporates GDP growth and inflation, may not fully take account of the recent turnaround in the labor market. If you are a President seeking reelection who has presided over a recession, it helps enormously if you can point to unemployment falling during the 12 months leading up to the election. Eisenhower could do that in 1956. So could Reagan in 1984 and George W. Bush in 2004. In 1980, Carter wasn’t able to do it, and neither was George H.W. Bush in 1992.

My uncautious prediction? If unemployment continues to trend down, and I expect it will, Obama will be set to join the former group of Presidents, who each went on to enjoy a second term.